All the more reason to make them fail. FDIC should pay insurance and otherwise fail the banks. Capitalism cannot work if there isn't feedback that not watching for things like this will hurt you.
All the more reason to make them fail. FDIC should pay insurance and otherwise fail the banks. Capitalism cannot work if there isn't feedback that not watching for things like this will hurt you.
I actually liked the approach that happened with several large companies in 2008 - the stockholders get wiped out, the senior management is gone, but the depositors get protected.
> the stockholders get wiped out, the senior management is gone, but the depositors get protected
Who are you thinking of?
That’s what happened in 2023. In 2008, depositors almost got wiped out and a lot of senior managers and stockholders got bailouts.
Where did depositors almost get wiped out in 2008?
At NetBank? Only if they were over the FDIC limit. Stockholders got destroyed, though.
At Bear Stearns? No, depositors got protected in a convoluted deal. The shareholders got very close to nothing.
At Lehman Brothers? They did "break the buck" on money market funds for a bit, but weren't depositors made whole? And weren't stock owners wiped out in the bankruptcy?
Washington Mutual? Depositors were covered by the FDIC.
Where were depositors "almost wiped out"? Where specifically? Where were stockholders bailed out?
> Where did depositors almost get wiped out in 2008?
“The [Deposit Insurance Fund] fell to the lowest point in its history, a negative $20.9 billion on an accounting basis, by year-end 2009.
…
To address this issue, the FDIC adopted a novel approach that required the banking industry to prepay its quarterly risk-based assessments for the fourth quarter of 2009 and for the next three years” [1].
Where did “significant amounts of cash” this was funded out of, which “banks were holding at the time,” come from? From the Fed and the bail-outs.
Without the bail-outs, banks wouldn’t have been able to fund the DIF and the FDIC would have faced the threat of insolvency.
> Where were stockholders bailed out?
Every institution that participated in TARP [2].
[1] https://www.fdic.gov/bank/historical/crisis/overview.pdf
[2] https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program
The fed was always a backstop to the FDIC by design. None of what happened suggests depositors "almost got wiped out."
> fed was always a backstop to the FDIC by design
No. The FDIC can borrow from the Treasury. Not the Fed. The Fed backstops’ banks liquidity. The FDIC backstops banks’ solvency inasmuch as it affects insured deposits.
We needed new laws in 2008 because the Fed’s backstop alone was insufficient. These banks weren’t just illiquid, they were insolvent. TARP gave them liquidity for “troubled assets.”
Sure. We're still waiting to hear how that translated into depositors taking losses and shareholders getting bailed out, though.
I mean, look, you can point to some losses by depositors - those over the FDIC limit, and when two money market funds broke the buck. You can also point to some instances where the rescues helped stockholders, at least compared to what their losses would have been. But the general trend was that shareholders took a bath, and depositors did not.
> FDIC should pay insurance and otherwise fail the banks
That’s what happened in 2023.
Are you talking about SVB? Because FDIC paid out much more than just insurance, it made sure everyone was whole. I think that set a very dangerous precedent.
> FDIC paid out much more than just insurance, it made sure everyone was whole
FDIC didn’t pay anything out. The new capital requirements and conservatorship processes worked.
> that set a very dangerous precedent
I don’t like how it happened. But codifying universal deposit insurance in U.S. banks isn’t a bad idea. Maybe one caps it for foreign deposits.
No, it is not. The way the SVB et al. collapse was handled was highly unusual. FDIC guaranteed deposits in excess of the insurance cap, bailing out (wealthy tech and VC) depositors to the tune of 30%ish of the fund set aside for such purposes. The Treasury stood up a new facility to prevent contagion to other banks.
You cannot do this if the big Wall Street firms collapse.
> You cannot do this if the big Wall Street firms collapse.
I'm not sure what you mean by this. Wall Street firms as such don't have deposits; Wachovia, Washington Mutual, and a number of smaller but still large banks were handled in similar ways to avoid any loss of even uninsured deposits.
Perhaps you're under the impression that the FDIC paid out of its fund for those deposits? (e: Originally I claimed this impression was wrong, but in fact I was wrong.)
Are you claiming that the DIF wasn't touched in the process of handling the collapse of SVB, Signature, and First Republic?
Are you further claiming that large commercial banks don't have depositors?
That was my claim, but it does seem like I was wrong. I'm going to have to figure out where I got this bad information from.
I do think that "Wall Street firms" in even the most expansive sense isn't generally understood to include large commercial banks. Some companies like JPMorgan are big enough in investment banking to kinda land on both sides of the line, but I've never heard anyone refer to Bank of America or Wells Fargo as a Wall Street firm.
Colloquially, I do feel that "Wall Street" is strongly associated with the banking system that people touch regularly, and not boutique funds and offices that they've never heard of. Might be a jargon issue.